Inflation up sharply on gasoline

By Mark Felsenthal

WASHINGTON (Reuters) - Soaring gasoline prices helped drive up U.S. consumer prices in May at the fastest rate in six months, the government said on Friday, but core prices remained tame, easing inflation fears in financial markets.

A separate report showed U.S. consumer sentiment tumbling to a 28-year low in June, with some lessening of expectations on inflation one year out and a steady reading on long-term inflation expectations, which held at a 13-year high.

The Labor Department said the Consumer Price Index rose a steep 0.6 percent in May, a touch more than Wall Street had expected, after a modest 0.2 percent gain in April.

However, so-called core prices, which exclude volatile food and energy cost, edged up just 0.2 percent.

U.S. bond prices and the dollar rose as traders scaled back expectations of Federal Reserve interest rate hikes. The stock market welcomed the news on core inflation and the blue chip Dow Jones industrial average was up about 166 points.

Surging gasoline prices and soft labor market conditions have depressed consumer spirits. The Reuters/University of Michigan sentiment index for this month dropped to 56.7 from 59.8 in May. Wall Street economists had expected a decline to only 59.5.

"Today's inflation numbers do not put any additional pressure on the Fed to hike interest rates," said Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina. "The Fed is not nearly as behind the curve as some people currently believe."

The reassuring data followed a series of inflation warnings from central bankers around the globe, and capped off a week in which expectations of higher U.S. rates had climbed sharply.